The Best Gold ETFs to Profit From a Rebound in Gold

Photo credit: Flickr user Sprott Money..

There are dozens and dozens of gold ETFs on the market, all designed to offer investors an attractive way to profit from the rise, or in some cases the fall, of the price of gold. Some gold ETFs track the price of physical gold either through direct or indirect ownership. Meanwhile, others own the stocks of gold mining companies, which typically rise and fall along with the price of gold. However, as I'll soon show, the best gold ETFs to ensure one actually does profit from a rebound in the gold price are those that own the physical commodity.

The best gold ETFs move in lock-step with gold pricesOne of the problems investors face when trying to profit from a rebound in a particular commodity price is that they can be right on their thesis, in this case that gold will go up, but be wrong in their chosen vessel. To visually display that point, take a look at the following chart, which tracks the uber-popular gold ETF SPDR Gold Trust , senior miners ETFMarket Vectors Gold Miners ETF , and the price of gold over the past 10 years.

GDX data by YCharts

What's worth noting is that while the price of gold is up roughly 65% over the past decade, both ETFs have underperofrmed, though the SPDR Gold Trust has nearly matched that move, up 60% with the slight underperformance caused by fees. On the other hand, the ETF of gold mining stocks, Market Vectors Gold Miners, has vastly underperformed the price of gold. Not only is it down nearly 58% over the past decade, but it also underperformed the price of gold when it moved higher out of the financial crisis, which is shown in the shaded area.

That underperformance of gold miners, resulting from a number of issues within the mining industry, including debt, cost overruns, labor issues, and management missteps, cost investors dearly. That's why the best gold ETFs are those that own gold and gold alone, because the risk of being right on the price movement and wrong on the investment just isn't worth the risk.

The best gold ETFsThere are a number of gold ETFs out there that own gold, but three really stand out.

1. SPDR Gold Trust.

2. iShares Gold Trust .

3. Sprott Physical Gold Trust .

As the following chart shows, over a long period, the trio largely matches the movement in the price of gold, though all three do underperform because of fees.

GLD data by YCharts

However, each has a unique characteristic that investors will want to consider.

The SPDR Gold Trust is the granddaddy of gold ETFs, holding more than $25 billion in assets. Its objective, according to its fact sheet, is "to reflect the performance of the price of gold bullion, less the Trust's expenses," which as the preceding chart noted, it has done a solid job of. That being said, its expenses, which are currently 0.4%, do indeed lead to some minor underperformance versus the price of gold. Further, it's also worth noting that "The Gold Shares represent fractional, undivided interests in the Trust, the sole assets of which are physical gold bullion and, from time to time, cash," again according to its fact sheet. In other words, the investment is in the Trust, which owns gold, and not directly in gold itself.

The iShares Gold Trust, on the other hand, is very similar to the SPDR Gold ETF, but it's smaller in size and has lower expenses. Its expenses are just 0.25% per year, which leads to less underperformance versus the price of gold over the long term, which is why it has done a slightly better job tracking gold.

Finally, the Sprott Physical Gold Trust offers investors a few new wrinkles. While its fees are a bit higher, as it charges a management fee of 0.35% per year and an administration fee that tacks on another 0.07%, the structure of the trust is more tax effective. Realized gains would be taxed at an individual's capital gains tax rate (which is as low as 15% if the trust is held for more than a year) instead of the 28% tax rate applied to gains from collectibles. So, should the price of gold skyrocket over the next year, an investor could keep more of his or her gain by owning the Sprott Physical Gold Trust than either SPDR Gold Trust or iShares Gold Trust.

Investor takeawayIn some ways, a case could be made that the best gold ETF is the iShares Gold Trust, since its expense ratio is cheaper, leading to less of an underperformance versus the price of gold. However, the SPDR Gold Trust is the gold standard and shouldn't be overlooked. Meanwhile, investors concerned with taxes might want to consider the Sprott Physical Gold Trust, because even though its expense ratio is higher, a big windfall profit after a surge in the price of gold could be taxed at a much lower rate, leading to higher absolute gains.

The article The Best Gold ETFs to Profit From a Rebound in Gold originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.